Tuesday, July 27, 2010

Are Regulators Attempting to Kill Off the Money Market Mutual Fund Industry?

Both the SEC and the President’s Working Group on Financial Markets (the Plunge Protection Team) are considering whether Money Market Funds should be forced away from their stable $1.00 value method of maintaining money market share prices. A move by regulators forcing money market funds away from the maintenance of the $1.00 price would cause huge hiccups in the industry and perhaps result in the end of the industry. At a minimum, it would cause huge withdrawals.

That regulators are suddenly focusing on these funds and at the core element of their appeal is curious. Are the insider banks behind the idea in the hope that the money will flow to them? Does the government expect more of the money to flow into Treasury Bills (then already does0? Whatever is behind this focus, there is no legitimate reason behind an attempt at such a regulation.

At Crane’s Money Fund Symposium, Paul Schott Stevens, President and CEO of the Investment Company Institute spoke about the problems that a move away from $1.00 pricing would mean:

...money market funds remain firmly opposed to proposals that would force them to abandon their stable per-share value. And we are not alone in that stance. America’s businesses, along with state and local governments, are rallying in opposition to any suggestion that regulators would force money market funds off their stable $1.00 net asset value.

The idea of floating these funds’ value is likely to be discussed in the President’s Working Group report, whenever it may be issued. And it’s still in the air at the SEC, which is contemplating a “round two” rulemaking to address any lingering issues in money market funds and Rule 2a-7.

Proponents of the floating NAV see this idea as a home run – a way to solve any problems of systemic risk that might somehow arise from money market funds with one swing of the bat.

We think it’s more of a foul ball.

Forcing money market funds to float their NAV will not eliminate the chances of investor runs. Nor will it reduce risks to the financial system in a severe liquidity crisis. What it will do is destroy money market funds as we know them – imposing severe dislocations on America’s households, businesses, and governments, and disrupting the American economy.

At ICI, we have been making this case to anyone who will listen, and urging users of money market funds and issuers in the money markets to speak out. And I’m pleased to report that they are responding.

In the last several weeks, groups representing state and local governments have come out squarely in opposition to forcing money market funds to float. The National Association of State Treasurers; the Government Finance Officers Association; and the National Association of State Auditors, Comptrollers, and Treasurers – all have voiced their support for the ability of funds to operate with a stable NAV.

The SEC’s own Investor Advisory Committee has before it a resolution, strongly backed by one of its subcommittees, that calls upon the Commission to preserve the stable NAV as a core feature of money market funds.

And America’s businesses are also mobilizing. Just last week, four of the leading organizations in corporate finance joined in a letter to Treasury Secretary Timothy Geithner urging him to reject the notion of abandoning the stable NAV. The letter was signed by the National Association of Corporate Treasurers; the Association for Financial Professionals; Financial Executives International; and the U.S. Chamber of Commerce.

They note that floating these funds will drive away investors, and the resulting drain of assets will [QUOTE] “severely impair the ability of companies to raise capital in the U.S. and undermine efforts to strengthen the American economy.”

More than 40 companies – many of them household names – have signed on to this letter or others urging the President’s Working Group to drop the idea of floating NAVs.

These organizations and others have emphasized that it is vital to preserve the essential, defining characteristic of money market funds – because they all recognize the highly important role that these funds play in our markets and our economy...

A retail investor expects that $1 put into a money market fund will count for $1 when writing a check or making a withdrawal. If money market funds cannot provide that, retail investors will have no alternative but to use bank accounts – by no means an ideal substitute.

Institutional investors already have many alternatives. But they stick with money market funds in large part because a floating-value fund would mean constant accounting and tax headaches. In such funds, investors must track realized or unrealized capital gains and losses in their position and conduct detailed record keeping when there are changes in the value of their money market fund investments.

So if regulators forced money market funds to abandon their stable $1.00 value, institutional investors would leave. As one institutional investor has told us, “If a money market fund is not dollar-in, dollar-out, you won’t have my dollar.” Indeed, many institutions are required by law or by investment policy to keep cash in stable-value accounts...

In short, forcing money market funds to float their values would kill these funds as we know them – without reducing systemic risk. In fact, it seems highly likely that the world would be a riskier place for investors, for issuers, and for the markets.

At the same time, the flow of hundreds of billions of dollars that money market funds supply to various sectors of the economy would be severely disrupted. Short-term financing that is vitally important to businesses would be at risk...

I'm no expert on this, but it seems to me that money market funds are a sort of ponzi scheme. As I recall, the crisis in the MM fund industry was caused by several funds "breaking the buck." Aftificially trying to hold a fixed value for something that really doesn't have a fixed value makes no sense. Ultimately, it is a doomed strategy, just like fixed exchange rates. Sounds to me like the MM fund industry is the ones that are looking for government favors instead of the other way around.